Tag Archive for inequality

Capitalism: ‘Its Own Worst Enemy’ (And Yours, Too, But Who Cares?)

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A pair of corporate CEOs have decided capitalism is ailing. They start their Project Syndicate commentary off in a super original way that isn’t cliche’ed in the field at all, riffing off Churchill’s famous quote about democracy being the worst system “except for all the rest”. The writers opine that capitalism is the worst type of economy, except for all the others they’ve no doubt researched exhaustively.

capitalism-is-dead

Paul Polman of Unilever and Lynn Forester de Rothschild of E.L. Rothschild are joining the ranks of liberal capitalists concerned that capitalism, after saving all the poor people from the very poverty it consigned them to, might at long last harm something that really matters: capitalism itself.

Capitalism has guided the world economy to unprecedented prosperity. Yet it has also proved dysfunctional in important ways. It often encourages shortsightedness, contributes to wide disparities between the rich and the poor, and tolerates the reckless treatment of environmental capital.

If these costs cannot be controlled, support for capitalism may disappear – and with it, humanity’s best hope for economic growth and prosperity.

Let’s break this down. First of all, Polman and de Rothschild think two of the most upsetting problems with capitalism are “shortsightedness” and its contribution to “wide disparities between rich and poor”.

The dominant economic system on Earth is apparently just one reason some people are rich and some are poor. The other reasons must be those invisible reallocation pixies that come in the night to transfer wealth to the haves, like reverse Robin Hoods.

Financial disparity is a problem in many ways that are getting lots of deserved attention lately, but I’d have to say the abject poverty that capitalism keeps much of the world in by depriving it of a sensible system for allocating basic goods and services to those most in need (instead sending them to those most able to pay), is a much bigger problem than the wealth gap. That is, a gap between super-rich and comfortable would be one thing; however, the actual canyon we’re saddled with is from a super rich elite to a massive underclass of billions who lack consistent access to basic necessities.

(Polman and de Rothschild do at the end of their article take a stand against extreme poverty in and of itself, but throughout the piece they maintain that capitalism is the savior from, not the cause of, such poverty.)

It’s not entirely obvious what is meant by “shortsightedness”, but in context of the piece, it seems to refer back to the main thesis: that capitalism will engender its own demise. They advise businesses to “look beyond profit and loss to maintain public support for a market economy”. Be less profit-driven in order to make sure the system that drives your profits remains intact.

Capitalism is of course also shortsighted in that the profit motive leads firms to eat their future lunch by eschewing long-term product and market planning to suit short-term returns. This seems to be another of the writers’ concerns, but it’s not inherent to capitalism, as Polman’s Unilever claims to demonstrate. (The other problems – inequality and environmental destruction – are indeed inherent to capitalism.)

And, yes, the writers really did cite “reckless treatment of environmental capital” – not devastation and unsustainability, and not the environment per se, but mere mistreatment of that portion of the natural world that is useful to capitalists – as the final of the three things capitalism does wrong.

Problems with markets and capitalism not cited by Polman and de Rothschild, most of them externalities not accounted for in the prices we pay for products and labor:

  • climate change
  • class antagonism
  • inhumane working conditions
  • alienated labor
  • animal exploitation
  • undermining democracy
  • absurd privatizations (schools, prisons, etc)
  • fiat currencies (and black markets)
  • debt
  • un(der)employment
  • intellectual property
  • limitless growth on a finite planet
  • crass consumerism
  • commodification of life

I’m probably missing some.

Anyway, what do Polman and de Rothschild say is the risk of not minding the problems that matter to them?

If these costs cannot be controlled, support for capitalism may disappear – and with it, humanity’s best hope for economic growth and prosperity. It is therefore time to consider new models for capitalism that are emerging around the world – specifically, conscious capitalism, moral capitalism, and inclusive capitalism.

Again, I would love to see the array of noncapitalist alternatives Polman and de Rothschild have familiarized themselves with in order to support their claim that (modified) capitalism is our best hope. It surely is a very dismal hope as it stands, but sure enough, these glass-half-fullers hold out that capitalist elites can save us from the certain disaster that would result from us shedding the yokes of concentrated capital, exploitative markets, and dehumanizing hierarchy.

These preferred “models” all

share the assumption that companies must be mindful of their role in society and work to ensure that the benefits of growth are broadly shared and do not impose unacceptable environmental and social costs.

Polman and de Rothschild don’t go into specifics, but these are basically mindset protocols, not actual economic structures or institutions; they’re not systemic models, just enterprise models. That is, business leaders are supposed to just do the right thing out of the goodness of their heart, with faith that in the long run, their bottom line will reflect the sensibility of prudent past decisions. Nothing to structurally incentivize or enforce changes, aside from a belief that doing the right thing will pay off.

Addressing the failures of modern capitalism will require strong leadership and extensive cooperation between businesses, governments, and NGOs. To begin creating a path forward, we are convening key global leaders in London on May 27 for a conference on inclusive capitalism. Top executives from institutions representing more than $30 trillion in investable assets – one-third of the world’s total – will be in attendance. Their aim will be to establish tangible steps that firms can take to begin changing the way business is done – and rebuilding public confidence in capitalism.

So after noting that the effort will have to involve governments and NGOs, though not necessarily any grassroots representation of civil society or apparently even organized labor, the authors brag that their conference will involve a staggeringly disproportionate representation of wealth. Advocates of “inclusive capitalism” will have the ears of elites representing a massive amount of capital, and presumably those representatives will have the ears of the government and civil-society do-gooders, as well. What could possibly go wrong?

The list of speakers at the conference includes representatives of such humanitarian institutions as the IMF, GlaxoSmithKline, UBS, and Dow Chemical, plus elites like Bill Clinton, Larry Summers, and fellow Titanic deck-chair rearranger, Jeremy Grantham. Apparently just one person from organized labor will be given a microphone, along with nobody from an environmental group or a consumer advocacy organization. The only identifiable progressive on the roster is Chrystia Freeland. But somehow, this meeting is expected to yield progress, without even having key stakeholders represented.

In any case, the argument here is that microeconomic adjustments by concerned CEOs and boards at major corporations, usually fighting the wishes of greedy shareholders every step of the way, will save capitalism from the litany of contradictions and abuses that threaten humanity, the environment, and yes capitalism itself. This notion is quite simply absurd.

But don’t take my word for it – read the Project Syndicate piece, and this one by de Rothschild, and this one on “moral capitalism”, and this one on “conscious capitalism”. Then decide for yourself if they (a) address the full host of problems with capitalism; (b) take the problems they do address seriously enough for the right reasons; and (c) even remotely meet a burden of proof required of a solution to be considered realistic.

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Capitalism… Ugh… What Now?

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One of the more disturbing examples of a prestigious economist foolishly phoning in his views on prospects for the future of economics came in the form of a recent interview with Nobel Prize winner Edmund Phelps. It serves to show us once again that a grasp of the real world or the ability to communicate effectively is not necessary for one to be academically successful in the field of economics. (Also not required: a heart.)

This barely coherent piece is so bad, I actually checked to see if it was a translation originally conducted in another language. I normally would never be moved to comment on something of such utterly poor quality. But a website I very much respect, The Browser, featured the interview, and a good friend cheered it on Google+, so I feel compelled to tear it to much-deserved shreds.

Questioned by the interview blog Thought Economics, the Phelps piece is called “Capitalism — What Comes Next?” The response, in case you couldn’t guess, is more capitalism. Interviewer Vikas Shah sets the stage early, lest we get up our hopes that what’s next is something not awful:

As the blinkers of egoism have been lifted, we (as a society) have realised that capitalism — while ostensibly responsible for the vast majority of our civilisation’s advances in the past quarter millennia [sic] — has also been responsible for creating vast inequality, conflict, and potentially irreparable damage to our planet. With no viable alternative to capitalism, however, the time has come to discuss “What happens next?….”

As is par for the “no alternatives” course, Shah doesn’t show his work, so we can’t evaluate how he’s assessed all the alternatives for viability, by what criteria, and so forth. These folks want us to consider their field a science of sorts, but they excuse themselves from the inconvenient duty of scholarly rigor. Bold assertions are allowed without scrutiny so long as they uphold accepted views that favor the privileged classes. And notice how open ended is the treatment of the future of capitalism — economists are encouraged to wildly speculate, and pretty much no one presses them on their pipe dreams, so long as they don’t challenge key facets of capitalism such as markets, hierarchies, and private ownership. Contrast this to the skeptical scrutiny any non-capitalist alternative faces, even from people who admit capitalism has been or has become a veritable train wreck.

So… since we can’t evaluate their no-doubt painstaking (if secretive) evaluation of all possible alternatives, let’s take a look at how Professor Phelps sees capitalism’s downsides.

The downside? Well… of course there’s always a downside to everything. Modern capitalism is a system in which some people are very lucky — they just happen to be at the right place at the right time… and can cash in big-time; while other people aren’t! Some people are very unlucky- they make decisions which turn-out to be ill-fated.

I guess I should be thankful that Phelps doesn’t say all advantages and disadvantages in capitalism boil down to merit, but I can scarcely imagine how he could otherwise present a worse understanding of the system. How could anyone be so out of touch as to suggest that the primary problem with capitalism is that some people are “unlucky”? How is “luck” even a concept acceptable in serious discourse? This guy won a Nobel Prize, but his view of inequity in capitalism is that it’s a matter of chance? Phelps implies that everyone has an opportunity, and some people have bad luck — he says their decisions are “ill-fated”. The supposition that everyone has an opportunity to roll the economic dice is reprehensible.

No, Prof. Phelps, capitalism ensures that most people are born in the wrong place at the wrong time. Most people have less than the average share of wealth and opportunity; the vast majority live in the same poverty they were born into and that all their neighbors live in. This isn’t making a decision that turns out unlucky. Billions have no turn at rolling the dice; the dice were long since rolled for them. They suffer deprivation induced by markets that shift material well-being — including necessities such as food, shelter, health care, and education — to those who can place valued economic demand on those resources, irrespective of moral influences. And let’s not forget, the resources are only scarce in the first place because the prevailing economic system allows some people to accumulate and horde vastly more wealth than they and their children and their children’s children’s children could ever hope to spend, while others languish in squalor for generations, including huge swaths of people condemned by class or geography to have no real opportunities.

Phelps admits that “there is naturally a huge amount of inequality within capitalism” (emphasis added). That is in response to a question about why there is poverty (not just inequality). He goes on to advocate a solution:

Capitalism can, to a degree, address that inequality by subsidizing — in one or more ways — the employment of workers at the bottom… low wage workers. It also helps to pull up their wages.

It is not at first clear what Phelps means about subsidizing low-wage work, or what “it” is in the second sentence that is so helpful to raise wages. But later he seems to be suggesting traditional subsidy in the form of government intervention. (Phelps never lists the “more” ways capitalism can address inequality.) It’s very weird to suggest a government subsidy is capitalism addressing the inequality it causes. The economy gets the credit for requiring government intervention to stave off poverty; how clever of capitalism.

So what good are these subsidies?

This helps increase economic inclusion and reduce inequality so that low-wage participants in an economy can feel that they’re not receiving unnecessarily low-wages and low-rewards… that society has addressed their situation and done something about it.

You see, it makes people feel like they’re not being screwed over. They are receiving “unnecessarily low wages”, because capitalism suggests employers keep the largest possible share of revenues, but the government can come in and make people feel like society has addressed this inequity. Phelps offers no concrete suggestion as to the form these subsidies should take, but he does at least advocate higher taxes to pay for them.

Then Phelps gets crude on a kind of magnificent level:

That will, of course, leave the Bill Gates’ of the world who are very rich because, besides being very bright and driven, they got extraordinarily lucky. Wealth inequality of that sort doesn’t cause me concern- It doesn’t matter to me that the Rockefeller’s may own half of Maine (for example) or that Ted Turner may own half of Montana… What does it matter? I think Ted Turner did a great thing with CNN and he’s very rich! so what? I just don’t get it. I just never understood why there was such an aesthetic revulsion to outsized rewards for people who had a big idea and- generally speaking- worked their heads off to develop that idea. I don’t have any problem with it. [SIC!]

So the revulsion to outsized remuneration is aesthetic, not moral or ethical? A single family owning or controlling massive amounts of property, thus restricting everyone else to share the remaining portion among themselves, is not a moral matter? It’s not immoral to deprive vast numbers of people of the basics in order to permit some to accumulate and horde extreme amounts of wealth? My objection to that is just a matter of personal taste?

And we see again that there’s nothing wrong with an economy valuing luck, perhaps because we all had an equal chance of being born a Rockefeller, and it’s tough luck if we were not.

Phelps then states that “there are plenty of leftist billionaires”. This is a curious claim. I wonder what he means by “plenty” and “leftist”. He does at least admit there are more on the Right. But that kind of calls into question, since the issue is political influence of capital, how one side having fewer can still have “plenty”.

When the conversation turns to the Arab Spring, Phelps staggers boldly into the land of the bizarre, redefining capitalism to suit his peculiar slant. This part is barely coherent, so read carefully:

I think Egypt and Tunisia were examples of yet-another economic system… namely the system which, for a lack of a better word, we call ‘Corporatism’. This system has private ownership… one of the things that Egypt did, for example, in the last ten or fifteen years was privatise a lot of enterprises. Those enterprises became owned by people in the military. Corporatism doesn’t mean social ownership… that’s socialism. Corporatism means that there is a great deal of central control, directed by the government, of the private sector. A great deal of regulation… a great deal of two-way communication occurs with the private sector seeking favours from the government and the government seeking the same from the private sector…. In Egypt and Tunisia, you had a very rudimentary corporatist system which was being exploited all-out by the rulers who took advantage of their powers to put their cronies in place as managers and owners of various enterprises. The bulk of the population, many of whom who- by this time- have college or university degrees of some sort.. cannot break into the system! They can’t get jobs in those enterprises.. they are strictly for the insiders. They can’t even sell their fruits on the streets without a license- and there aren’t very many of those [licenses] distributed. It’s a very closed system… a system that’s about as far from modern capitalism as you can get! Well functioning modern capitalism allows anybody to start-up a company, to go into business for himself, and start coming up with new ideas, and working on their development.

Okay, for starters, I think Phelps’s assessment of the situations in Egypt and Tunisia are generally sound, if a bit elementary. That’s not where my gripe is.

I’m slightly more concerned with the near-useless label “corporatism” for a heavily regimented private-ownership economy. It sounds like fascist corporatism in the European sense, but in the US, corporatism is understood to be when private enterprises dominate society, not when the government strong-arms corporations. Basically, the term is close to meaningless, even as Phelps defines it. (The Thought Economics blog appears to be UK-based, but Phelps is an American US-based economist.)

Yet this semantic gripe pales compared to how odd it is that Phelps describes a model that is essentially identical to that of the US in structural description — the US being an economy he says is truly capitalist, not “corporatist”. Phelps basically describes the US “modern capitalist” system (when describing Egypt/Tunisia), then says it’s as far from modern capitalism as an economy can get. Jobs for insiders only, licenses required for fruit vendors, private sector and government in bed with each other — how is this not precisely what we have here, let alone the farthest thing from it? While I think it’s safe to say corporate influence on government is far stronger than the reverse in the US, that hardly makes it the polar opposite of a scenario where the reverse is true but the effect on everyday people is nearly identical.

Granted, in Tunisia and Egypt, these noted obstacles are in some ways much more severe, but the difference is one of degrees, not fundamental or structural. What a strange way to make a case that an economic system is not like that of the United States.

Finally, skipping lots of other weirdness that’s simply too depressing/obtuse to critique, we get to the big question of interest to FuturEconomy.com. Shah asks Phelps, “What is the future of economics as a discipline?” After prattling on about his own past contributions to the field of economics, which I won’t comment on here because I’m admittedly unfamiliar with them, Phelps provides his response:

Economics has contributed to the march away from these principles by reducing economies to ‘stochastic steady-state models‘ in which prices are the entire interest. Prices, in these models, ‘vibrate’ in some way. I find this incredible…. This thinking began seeping into the financial sector so then the banks started importing French mathematicians to work out how to price various assets as if anyone could possibly know what these assets are worth? We live in an uncertain world… not just a vibrating one! Economics will (and should) always have a scientific side… but it has to remember that no piece of evidence is ever decisive on its own… we have to understand that our subject is human creativity. That will be a very different kind of science from what we have had before. There hardly is any science of creativity yet- yet alone a science of individual or societal creativity which understands the interactions of people- that’s the next giant-step.

Now, I admit I don’t really have a clue what he’s talking about. I could guess, but I don’t think I should have to. He should just explain it, or his interviewer should if he thinks it’s worth publishing at all. Excluding the ironic polemic on the importance of science in economics, I want to focus on the one real declarative statement that I can at least understand syntactically.

Phelps says the field has reduced economies to “stochastic steady-state models”. I think perhaps this is a somewhat astute observation about the world of finance. Wall Street and its in-house economists and consultants and analysts seem to have done this. And you’ll notice, Shah has linked to the Wikipedia entry for “steady state”, the scientific modeling concept, not the economic concept, which is also referenced in that entry.

Now, if you think about it, the academic and broader field of economics has really done the opposite with regard to everything outside of Wall Street. Almost nobody is looking at the US or global economies as “steady state”. They’re instead hanging onto the ages-old notion of infinite growth. A steady-state economy is fundamentally different from a dynamic growth economy. Have you seen a trend among economists to declare that consistent growth is no longer (or even should not be) desirable and possible? For the most part, liberal and conservative economists fully agree that growth is the way forward; their only dispute is over how to grow the economy (and to some much lesser extent, for whom). Only a few people are talking about steady-state economies that are fixed to population size and do not grow via fiat currency and financial leveraging.

The almost hilarious paradox here is that, in answering what needs to happen next for economics, the field, Phelps misses an opportunity to say we should be entertaining the school of steady-state economics because we live on a steady-state planet. Instead, he offers a vague prescription about how economics needs to get “creative” in looking at human capacities (at least, I think that’s what he’s saying).

To end on a positive note, let’s take Phelps’s advice: what could be more creative than exploring — with a firm grasp on the relevant science — ideas for steady-state non-capitalist economics? I’m going to try to do more of that here in coming weeks.

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